GBP/USD falls as the UK outlook darkens

UK energy price cap pulls the pound lower.

UK households face around an 80% rise in gas and electricity bills from October after Ofgem; the market regulator jacked up its price cap sharply.

This latest hike by Ofgem is set to squeeze household incomes further, deepening the cost of living crisis in the UK. With a larger percentage of monthly wages spent on heating the home and feeding the family, disposable income is set to tumble further. Given how reliant the UK economy is on the service sector, the economic outlook is deteriorating rapidly.

The UK is expected to fall into recession in the fourth quarter. The recession could be long and deep without a rapid solution to the energy crisis here, which looks unlikely.

These fears are reflected in the pound hovering around a 20-year low below 1.18. Given the bleak outlook and the strong USD, GBP/USD could continue falling toward 1.14.

USD rises ahead of Fed Powell’s speech

The USD is edging cautiously higher, paring losses from the previous session as investors focus on Fed Powell, who could shed some light on how high the Fed sees interest rates rising.

Recent Federal Reserve speakers have been hawkish, setting the tone for a hawkish tone from Powell. US CPI is four times the Fed’s 2% target which means that the Fed’s work is yet to be done. Powell will likely reiterate the Fed’s commitment to bringing inflation back down.

While CPI cooled slightly in July, the Fed will want more evidence that inflation is falling and not plateauing at a lower level before any signal of a dovish pivot. With more jobs data due before the next Fed meeting, guidance on the size of a September hike is also unlikely.

The CME Fed watch tool shows that the market is pricing in a 63% probability of a 75-basis point rate hike while the likelihood of a 50-basis point hike has slipped to 37%.

There are only a few more meetings before the end of the year, and inflation remains stubbornly high. Powell may warn the market that Inflation and rates will likely remain higher for longer heading into 2023, which could send the USD higher.

Where next for GBP/USD?

GBP/USD trades below its 20 & 50 sma and multi-month falling trendline. The RSI supports further downside while it remains out of the oversold territory. Sellers need to break below 1.1717, the 2022 low, to test the 1.1700 round number and bring 1.15, the March 2020 low, into target.

On the flip side, buyers will look for a move over 1.1870 the weekly high and falling trendline resistance. A move above here opens the door to 1.20 psychological level.